Are you talking about taking a 401k loan to cover closing costs?

Be aware:
Moving in with no "buffer" can be dangerious. And I don't just mean moving in expenses and the wife wanting a new sofa.

 

Since rebuilding my 401k would take no time, and we would have about $400 a month more just from dropping our ridiculous rent, would using my 401k work for us? I also feel like a physical house and land is a much better investment than a 401k. Thoughts?

I think that cashing out your 401k is a mistake, not least because you will take a massive tax hit on it. In addition, you are gambling that there will be discretionary income available in your future to 'rebuild' the 401k (both in terms of the money you cashed out and any growth it would have experienced). Your use of the word 'investment' when discussing land and a house also bothers me. Neither one provides a return on capital, and both feature annual property taxes.

If rebuilding your 401k will truly take 'no time', then you might consider stopping contributions to it in order to build up cash, because clearly you don't have very much in it. But cashing it out? Don't.

 

Yeah it would be a 401k loan. I know it's generally frowned upon, but I'm 30 years at the very least from retirement.

I know it's probably not the smartest to be purchasing with our current financial situation but with rents being so high in my area it's difficult to get out once you get started. We kinda caught a window with my wife recently getting a promotion and we are going for it. If we run into trouble I could sell part of my ammo stash off to cover problems in the short term but I'd rather not do that outside an emergency.

 

I'd say traditionally frowned upon (with good reasons which have already been listed) as well as the "why don't you save up instead"

But in certain circumstances (yours with the rent MAY be one of them) I can see it working.

I would be VERY careful of you calculating your expenses correctly. As well as your employment security before I did so.

 

I see no downside to taking a loan on it except if you get terminated and you can't pay it back in 2 months, you will get hit with the 10% penalty PLUS get a big hit on your taxes. However, maybe you should take the extra $400/mo and pre-pay the 401K loan every month if your plan allows it. You are already used to living without the $400.

 

to put it bluntly, I know literally nothing about investing/saving. I came from a low income family who lived paycheck to paycheck to make it. That's all I've ever known. I'm not going to do that my whole life. I'm doing my best to make sure my finances are in perfect order because I've learned it's not how much you make, it's what you spend. And right now I'm trying to get the sole biggest problem fixed: ridiculous rent.

 

I grew up in the same situation. I know exactly how you feel.

I would suggest you check out some resources by Ron Blue, Dave Ramsey, and Howard Clark. Dave Ramsey is probably the most popular on this board and I have taught his classes many times, but he is probably the weakest of the three if you are willing to really work hard and have self discipline.

If you only take a loan and can pay it back very quickly, have little risk of leaving your job or getting let go, then the 401k loan can be an attractive but it does have some risk. If your employer is making a match, you definitely want to take advantage of it. You may need to rebalance your accounts and investments.

 

I think it will put you in a bad position to borrow against your 401k for a down payment.

Not only will you have a mortgage payment to make but you'll also be paying against your 401k loan. You will probably be in a situation where you have NO extra money if anything comes up. My best suggestion is to save for a few more months / whatever until you can cover closing costs.

 

When you do the questionaire for the loan, it may ask if the loan is to buy your primary residence. Get all the facts before you do anything. I've taken out a few 401K loans over the years and always been able to pay it back. They are a good deal since you are paying yourself back. One downside is depending on the size of the loan, it can impact the pool of money the 401K uses for investing.

 

Why not just roll the closing costs into the mortgage? The $400 per month cushion applied to the principal would knock them out of the equation quickly.

BTW, shop around for a settlement agent. Get a couple to give you Good Faith Estimates on closing. Compare them line by line with the lender's. I've always been able to beat the lender's agent on price.

The lenders like to build in some extra spiff in their "closing costs".

 

Can you make the seller pay the closing costs? As the previous post stated, roll the amount into the mortgage, offer them an equal amount on the loan to cover the closing costs if that's what it takes. If it's the downpayment you're looking to come up with i would question how big of a downpayment you're making. If you can't come up with 5% excluding closing costs for a conventional loan you should not be making the purchase. period. Also, avoid FHA and go conventional if possible, costs almost the same but FHA is a smaller down-payment and is more fees paid.

 

In the most polite way possible, I'll ask why don't you have any cash now?

 

In the most polite way possible, I think he explained he wasn't born with a silver spoon.

Would you like to guess the percentage of people who were raised in the bottom quintile of income who have a down payment and closing costs saved up by 22? I am pretty sure you can count it on one hand.

The guy is trying to change his family circumstances and stop throwing money away. I think that should be commended.

 

My husband and I did what you're considering - we took out a 401k loan to pay closing costs and cover some things we needed for our new house two years ago. Looking back on that and seeing where we are now - if you're going to go ahead with it, be very careful about how much you take out. We are swimming in bills now because we went a little overboard. We've made progress, but finances are still very tight. With that said, I agree that a home and a piece of land are one of the most important assets you can have. Be as prepared as you can for the unexpected

 

Just keep in the back of your mind 2008-2009. If it happens again soon, you best not be in the shooting gallery! My motto is if you don't have the money, don't buy it! 401k is for retirement only in my honest opinion.

 

Well, a savings account[401k] is just digits in a computer. Some folks on this board are fond of saying you can't eat cash, or precious metals or other things, well they are at least things you can hold in your own hands.

I take the extreme prepper view that disaster is just around the corner, not just maybe someday 20 years from now. Both my wife and I had ancestors who were well off before the great depression, and ended up living off of jackrabbits.

One argument against owning a home is that not only do you have mortgage payments but you will be responsible for maintenance. But you say you grew up as a poor boy. Most of us poor boys know how to do our own maintenance.

Farmers are a prime example of people who have security in REAL things, like REAL ESTATE. Most of them are cash poor but they are actually WORTH gobs. Land, buildings, tools, and SKILLS to be independent. You may never be as rich as a farmer, but by owning something REAL, and then building on it you are separating yourself from the sheeple and learning to be independent.

Maybe if you are lucky your mortgage account which will probably be just digits in a confuser may disappear too.

 

Farmers are prime examples of those that get special tax advantages that create the illusion of being cash poor while having high net worth.

http://www.forbes.com/sites/ashleaebeling/2012/06/06/farm-like-a-billionaire-harvest-tax-breaks/

 

Houses often require money for unplanned expenses. You are going for 100% financing! and still don't have cash to close? You should not be buying a house.

Save up an emergency fund first - minimum 3 months expenses.

Then save up at LEAST a 20% down payment plus closing costs - any less and you will be throwing away money every month for private mortgage insurance (PMI).

Then, and only then, should you buy a house.

 

Keep in mind, as a first time home buyer, you may withdraw up to 10K from your IRA without paying a penalty, you just pay normal taxes.

 

I hear ya bud. I just got married last October and bought my house last August. 25 years old.

Take it for what it's worth, houses cost cash. Heck, I've got 500 in paint that I put on just to cover the Marti gras colors my house was. The Washer and drier you will need, a good 800 bucks, she needs a fridge, another 1k out the window.

And don't forget stupid stuff like lawn care. I cut my own grass, to save that 80 a month, but your buying a lawn mower and weed eater. Garden hoses....

I'm ranting a little, but just know what your getting into.

 

This is partly how I bought my first condo; with a loan from my 401K. All that ended up happening was I paid myself back with interest. Worked out fine.

Like you, the math worked out that the money I'd save vs. renting covered the repayment costs. Yes, of course there were tons of other little things that added up with home ownership, but I'd accounted for most of that.

There's very few good reason for going into your 401K. This is one of the valid ones, as long as you have a plan and stick to it. Now is there risk and can bad things happen? Sure. And of all people, prepare folks try to manage that risk. Still, sometimes you just have to do what seems to be the right thing for the short and medium term. You don't want to get so paralyzed by risk you end up in a worse place that you otherwise might have been if you'd just taken a well calculated plunge.

 

We haven't got to talk to a realtor or seller on the few places on our short list right now. With the rural development loan, if I get the house for less than its appraised value, I can still borrow up to the appraised value for closing costs or repairs or whatever. Plus the option to have the seller pay is still on the table. I'm just looking into using my 401k as a 3rd option also. Options are a good thing. All the houses we are looking at are eligible for it, and for good reason.

 

The problem is that most appraisers purposely overshoot the appraisals due to tricks like this. You pretty much bank on the idea that you can ALWAYS get a house for less than it appraised for. So then what, you still finance what it did appraise for? Congrats, now you are instantly upside down on a house that you just bought.

 

You are too young and too newly married to be taking on a 100% financing rural development loan. Let your relationship develop before partnering on such a big scale. Rent keeps it simple and allows for sudden changes. Living in a mortgaged home limits you for a long long time. Get some savings behind you. Leave your 401(k) alone. A house and land is NOT an investment. It is a responsibility and a consumer of money and time. Those are my thoughts. I Gave my son the same advise.

He didn't listen.....4 years into marriage....a baby and a pending divorce with a house neither of them can afford separately. They are going to have to lean on other family members for support because they were too dead set on what they wanted....not what was obviously the most prudent course of action. Don't be in a big hurry to be all in.

 

I always cringe when people look at buying a house with A)No money down or B)depleting all their cash for down payment.
The average homeowner spends 10-15% of their purchase price of a new home, on general household expenses and items the VERY FIRST YEAR they move in. As mentioned above, you have lawn mowers, weed eaters, garden hoses, paint, window treatments, grass seed, sprinklers, new furniture (you can't move that old couch into the new house ...) the list goes on and on. The issue you will have if you attempt to buy a house when you have no savings is that you will do just as you did when you got married... You will spend money you don't have and put it on credit cards. The next thing you know, you will owe a couple thousand dollars on a credit card or two and not even know how the balances got that high. Then you have a house payment, car payment, credit card payment, etc. and you start putting basic expenses on the credit card. trust me, I see it all the time.

I think home ownership is great but many young couples get caught up in the hype of homeownership because they are "throwing" rent money away. In reality, if you finance 100%, do a 30 year mortgage, your principal reduction will be minimal and likely less than the annual maintenance on your home.
Again, home ownership is great, just don't rush into it and cause yourself to dig a hole you can't get out of. Sometimes renting, especially while young, makes way more sense than people give credit.

Back to your original post question, (after my opinion) if you want to borrow for your down payment, it should be OK. The 401K loan is likely your best option. The mortgage lender will not even have to count it against you as debt. As mentioned though, you may be able to withdraw money (not a loan) without penalty. there is no risk in this as you never paid taxes on this so it's no different than your boss giving you a big bonus check. You will simply pay taxes on it at the time of withdrawal.

Just make sure the timing is right for the purchase and you don't let the stress of a new home get in the way of enjoying your first few years of marriage.

 

Or I buy a modest house now on a 30 year note, deal with money problems now when there's no kids around, and get myself on track to retire at 50? I get there's going to be expenses I don't see coming. I understand it's going to be an absolute pain at times and I understand I have more financial freedom renting. We are saving a lot of our money on the houses we are looking at from the remote locations we want, not so much the age or quality of the house. It doesn't bother either one of us in the least bit to drive 45 minutes of one lane mountain roads to get to work. I know the short term this isn't the greatest of ideas but 20 years down the road it will be worth it I think.

 

deal with money problems now when there's no kids around

You've already got money problems though. You need to fix that before you take on more responsibility. I realize you don't want to hear it but it could very possibly make things worse. You are taking a risk that you don't need to take.

Buying a house sooner when you are financing all of it doesn't make things better. At first nearly all of your payment is interest. If long term is the goal, you would come out ahead by saving up a big downpayment.

and get myself on track to retire at 50?

I thought this same thing. Except my goal was 40. Thought I was on track too, except the house was just a money pit.

We are saving a lot of our money on the houses we are looking at

What are these actual numbers anyway? You say you're saving $400 a month, except that's probably not including insurance, PMI which you will have due to 100% financing, property taxes, upkeep, at least 1.5 hour round trip of driving every day possibly 3 hours if you drive separately, plus maintenance.

 

The cheapest apartment I know of in town (I looked before I moved into this one) was a 1 room, 250 sq ft studio for $500/month. our mortgage on a $100,000 house would be close to that, no more than $200 or so more. Admittedly our rent is high because i picked a nicer place to live, but some of the dumps i looked at i wouldn't be comfortable staying there. our rent now is close to 1k.

 

That is very expensive for an apartment. You should be able to get cheaper places especially if you move away from town a little. I wouldn't use that $1K number as what you use in comparison. You're basically comparing leasing a new Cadillac to buying a used entry level car.

 

But hey, you know what they say... "There is no such thing as a hard decision. You just don't like the decision you've already made."

 

Let's say you get this house for $500 / month. Expect insurance to be $60/month. Outside maintenance? You will need a mower.......gardening? Driveway repair.......tractor? Let's say another $200/ month averaged over a 30 year period. Roofing? Siding? Gutters? Taxes? Let's add $300 /month. You will want to buy more land. Your cars will get beat up and maintenance will cost you at least an additional $100. Add gasoline costs.....a big unknown as the price is volatile. Now a kid comes along. Inside the appliances aren't in good shaped....washer, dryer, refrigerator, freezer, furnace ....that's a big one. Plumbing is so so.....hot water heater is shaky. Add another $200/month.

30 years is a long time and a lot can happen with a house. What kind of foundation have you built financially that will support you in an emergency? You can see that living month to month is just setting yourself up for hard times. Get six months of income saved and a healthy emergency fund and then get the down payment money saved......THEN get the house if you want to. Don't be a victim of the Instant Gratification ITIS.

 

Let's say you get this house for $500 / month. Expect insurance to be $60/month. Outside maintenance? You will need a mower.......gardening? Driveway repair.......tractor? Let's say another $200/ month averaged over a 30 year period. Roofing? Siding? Gutters? Taxes? Let's add $300 /month. You will want to buy more land. Your cars will get beat up and maintenance will cost you at least an additional $100. Add gasoline costs.....a big unknown as the price is volatile. Now a kid comes along. Inside the appliances aren't in good shaped....washer, dryer, refrigerator, freezer, furnace ....that's a big one. Plumbing is so so.....hot water heater is shaky. Add another $200/month.

You forgot PMI and property tax.

Driving 45 minutes each way to work is pretty ridiculous as well. Sounds like it is no big deal but my dad did this for 20 years. This is also soul sucking. He bought a truck brand new and put well over 400,000 miles on the thing mostly just driving to work. Had to overhaul it himself four times because we couldn't afford to buy another vehicle or pay somebody else to do it. Just kind of ridiculous that somebody would willingly submit themselves to what I've seen first hand. To think that this is the path to early retirement is being naive.

 

I don't care for the idea of cashing out or borrowing from my 401k. I am in the process of buying some land and am currently contributing 10% of my income to the 401k. I plan on building my own off grid home without a bank loan so money will be tight for a while. Rather than cashing out the 401, I intend to reduce my contributions to 3% and put the other 7% (minus taxes of course) towards the savings for the house build. I know this doesn't help you when buying but just an idea for others.